Glossary

Here you’ll find definitions to some of the most common terms in foreign exchange, from ‘CHAPS payment’ to ‘IBAN’

BACS payment

A BACS payment is an electronic method of transferring funds between bank accounts. BACS stands for Banker’s Automated Clearing Service, and it was created in 1968 to help make financial transactions without paper. It is used by most UK banks and brokers – including us at Pure FX.

From the point of view of someone transferring funds abroad, you can compare BACS payments with CHAPS payments. BACS payments for instance take 3 working days to clear, meaning should you begin the payment on Friday it won’t arrive in the payee account till Tuesday. CHAPS payments on the other hand clear same day but cost up to £40.

Hence before choosing how to transfer it is best to decide how much of a hurry you’re in.

To make a BACS payment, you will need your sort code and the account number of the payee account.

Cable transfer

Simply put, a cable transfer is the transfer of funds electronically between bank accounts in different countries. It is differentiated against a wire transfer, in which funds are transferred between bank accounts in the same country.

Foreign exchange lore has it that the term cable transfer appeared in 1858, when a steel cable was laid under the Atlantic Ocean to link the USA and UK to enable financial transfers. Since then, though fibre optics and satellites have replaced steel cable, the term is still used to describe international transfers. It is also used to describe the foreign exchange currency pair GBPUSD.

Central banks

Central banks (including the Bank of England and European Central Bank) are public institutions responsible for monetary policy within a nation or group of nations. In most cases they are politically neutral to protect them from partisan bias: George Osborne for instance cannot turn to Mervyn King and compel him to raise interest rates.

From the perspective of someone transferring funds, central banks are important because their announcements can have a huge impact on the exchange rates. Should the Bank of England announce it is raising interest rates for instance, sterling could leap against its rivals on the foreign exchange market.

Hence it is worth keeping up to speed with what the main central banks (including the ECB and Federal Reserve) are up to.

CHAPS payment

CHAPS stands for Clearing House Automated Payment System. It is a same day transfer handy if you need to send funds between banks accounts as fast as possible – for instance when sending money to buy a house or car. The features of CHAPS payments include:

1. Guaranteed same day payment.

So long as you make the payment before the bank’s deadline, it should arrive in your account on the same day. This is brilliant if you need to transfer funds in a hurry. The deadlines depend on the individual bank.

2. Often charged.

Unlike other types of international transfer, CHAPS payments can often incur a charge. This can be between £20-£35 depending on the bank.

3. Extra secure.

CHAPS payments are only cleared once they’ve been checked by a senior manager. This is useful if you’re looking for a little extra security.

4. Cannot be reversed.

Unlike other types of transfer, CHAPS payments are irrevocable and cannot be reversed. So be sure you need to make one!

Cleared funds

Cleared funds are funds that have arrived in their destination bank account, having been processed. If a foreign exchange dealer says to you ‘Your funds are cleared!’ it means you can use them, because the transfer is complete.

The term ‘cleared’ is used because, before becoming available to you, it can take banks a few days to clear (i.e. make sure they’re alright for usage) the funds. The amount of time it takes a bank to clear funds depends on the bank and their respective regulations.

Consumer price index

The Consumer Price Index (or CPI) is a measure of inflation, used to determine changes in the price of household goods and services. For instance, should inflation in the UK reach 4.4% in a certain month, that means that on an annualised basis prices are increasing at 4.4%.

Should inflation the next month reach 4.8% that doesn’t mean prices rose 4.8% in a single month: just that the annualised rate of inflation increased i.e. inflation across all 2011 rose.

The CPI is measured using a standardised list of items and products called the market basket. For instance, this month in the UK the rise in inflation from 4.2% to 4.4% came down to increases in the price of clothing and rent.

From the perspective of transferring funds, the CPI is important because it drives movement on the foreign exchange market. Increases in inflation tend to bring the pound up since the markets anticipate the Bank of England will raise interest rates to compensate, increasing returns on UK investments.

Currency pair

A currency pair – believe it or not – is a pair of currencies. For example a common pair is GBPUSD, in which the first currency quoted here is the UK pound and the second the US dollar. In a currency pair, the first currency featured is the base currency, and the second is the quoted or counter currency.

When you transfer funds abroad, you automatically work in terms of currency pairs because you’re buying one currency and selling another. In the example GBPUSD for instance, you’d be selling UK pounds and buying US dollars. The exchange rate you see when doing this – for example 1.6466 GBPUSD – means you’ll receive that many US dollars for each pound sterling. Hence with a 1.6466 GBPUSD exchange rate you’d receive 1.6466 US dollars per pound.

Perhaps the best part of currency pairs is that specific ones have nicknames. Take a look at the following list for instance:

This isn’t necessarily something you need to know when transferring funds, but we think it’s fun.

Currency basket

Alas, a currency basket is not a range of foreign coins held in a weaved wicker receptacle. Instead, it is a range of currencies grouped together with different weightings, in order to minimise the fluctuations between them.

For instance, prior to the introduction of the Euro in 1999, the European Union used the European Currency Unit (or ECU) in aid of making financial transactions between EU members easier. Hence, inside the ECU, currencies including the pound, French franc and German deutschmark all belonged to the same basket.

Forward contract hedge

Forward contracts let you fix the present rate, protecting you against declines in the rate closer to your transfer date. This is useful should the present rate be good, and you’d like to protect yourself against downturns.

The term hedge refers to locking in the exchange rate. In short, you hedge against potential loss. Future contracts are opposed to spot contracts in which, instead of locking in the exchange rate for the future, you transfer your funds today.

IBAN

The IBAN number is a series of letters and numbers assigned to your bank account to give it a unique identity. When you send money in or out of mainland Europe, you can avoid unnecessary delays to the transfer by using your IBAN number instead of your bank account number.

You will also have to use your BIC (bank identification code) or SWIFT code to get the transfer underway.

How do I find my IBAN number?

To find your IBAN number, just access your bank account line and take a look at the details! It should be available in the ‘Account Summary’ section.

LIBOR

LIBOR stands for London Inter-Bank Offered Rate. It is the rate at which banks transfer funds to other banks on the London finance markets.

So when you look at the foreign exchange rates published on sites like Google and the BBC, those rates are the LIBOR rates. Unfortunately, because banks lend to each other in huge amounts, these rates are only available between banks, meaning no one else can secure the rates published there.

Market sentiment

Market sentiment is the predominant attitude among the markets about a currency. It is the culmination of the feelings of all investors about recent technical and fundamental data affecting a currency.

For instance, if market sentiment toward the pound is bearish (or pessimistic) because retail sales have gone down, that means sterling stands to lose value. If on the other hand sentiment toward sterling is bullish (or optimistic) because growth is strong, it could gain on the markets.

Spot contract

In foreign exchange, a spot contract is a transfer arranged to happen at the present time at the current rate. It obliges the person changing currencies to accept the present rate. Spot contracts are opposed to forward contracts, in which the person accepts the present rate for a transfer to be made in the future.

How do you decide which kind of contract to use? Spot contracts are useful if you need to transfer as soon as possible. Forward contracts are preferable if you plan to transfer in the future but likes the present rate.

Stop loss contracts

Stop loss contracts are contracts in which – should the exchange rate drop below a certain point you decide – you are protected. So for instance, if the exchange rate is at 1.60 when you plan the transfer, you can set a stop loss at 1.57, so that if the exchange rate drops beneath that you are safe. This is great to protect you against potential losses in the exchange rate.